First American Chief Economist’s Existing-Home Sales Capacity Model Increases 0.4 Percent in August

—Market capacity for existing-home sales has remained close to six
million sales on an annualized basis for more than a year, says Chief
Economist Mark Fleming—

SANTA ANA, Calif.–(BUSINESS WIRE)–First
American Financial Corporation (NYSE: FAF), a leading
global provider of title insurance, settlement services and risk
solutions for real estate transactions, today released First American’s
proprietary Existing-Home
Sales Capacity (EHS-C) model for the month of August 2015, which
provides a gauge on whether existing-home sales are under capacity or
over capacity based on current market fundamentals. The EHS-C rate
increased by 0.4 percent compared to July and decreased by 1.1 percent
compared to a year ago. The seasonally adjusted, annualized rate (SAAR)
of existing-home sales capacity is up 82.1 percent from the low point of
sales reached in February 2009*. The EHS-C increased by
26,000 (SAAR) in August.

“The two-tenths of a percent drop in the unemployment rate and continued
rise in disposable income were factors that helped push the market
capacity for existing-home sales higher,” said Mark Fleming, chief
economist, First American. “Additionally, continued gains in house
prices and the mortgage rate falling below 4 percent again were also
factors that contributed.”

Market capacity for existing-home sales has remained close to 6 million
sales on an annualized basis for more than a year, while actual sales
activity has increased and significantly closed the gap between market
capacity and actual existing-home sales. This year, through July, actual
existing-home sales have increased by almost 800,000 sales.

EHS-C is down 480,000 (SAAR) from the most recent peak in February 2014.
Actual existing-home sales improved dramatically this summer to narrow
the gap between market capacity and actual sales. The current
underperformance gap is an estimated 307,000 (SAAR), which is
significantly less than the sales capacity gap of 1.7 million
existing-home sales in February 2014.

“The primary reason for the improvement in the underperformance gap
between market capacity and actual existing-home sales is the release of
pent-up housing supply triggered by existing homeowners with improving
equity positions due to robust house price appreciation putting their
homes on the market,” said Fleming. “In addition to more sellers also
becoming buyers, household formation is gaining strength and will become
a source of first-time homebuyer demand. Millennials and boomerang
buyers – those who were foreclosed on during the crisis but have since
repaired their credit – will be an increasing source of demand for
existing-home sales.”

Early
forecasts for August actual existing-home sales predict an increase
to 5.64 million seasonally adjusted at an annualized rate. This would be
an increase of just 1 percent over July.

“This should not necessarily be taken as an indication of any major
shifts in the market. Instead, it should be considered a reflection of
the fact that actual existing-home sales are beginning to approach
fundamentally supported market capacity,” said Fleming. “As actual
existing-home sales and market capacity for existing-home sales
converge, a decrease in the pace of change is to be expected.”

Impact of Possible Fed Rate Increase

The Federal Reserve may decide to raise the benchmark federal funds rate
today. Earlier this week, First American’s Chief Economist published an
analysis of the impact of a possible rate increase on existing-home
sales and house prices entitled, Does
a Fed Rate Increase Doom Housing?

“We concluded that while the housing market isn’t doomed by a Fed rate
increase, it would modestly adjust, along with a modest decline in
market capacity, as well,” said Fleming.

Earlier this week, Redfin
reported the results of a survey of homebuyers indicating that if
mortgage rates rise to 5 percent (a highly unlikely scenario in the near
future) most homebuyers would stay in the market. According to the
Redfin survey, homebuyers would adjust their approach by looking for a
less expensive house (44 percent), or saving more for a down payment (21
percent).

“This is further evidence of the modest impact an increase in interest
rates has on housing demand at the moment. The housing market seems to
be approaching a new equilibrium with existing-home sales capacity in
the neighborhood of 6 million, with actual sales closing the
underperformance gap,” said Fleming. “Even the risk of rising rates may
not warrant much concern, as most borrowers are indicating that they
will adjust without dropping out of the market and our proprietary model
shows the overall impact of a rate increase to be modest.”

*Previous EHS-C releases referred to November 2011 as the low point of
sales. The model used to generate existing-home sales capacity has been
enhanced to more accurately reflect the dynamic relationships between
sales, prices, interest rates and the user-cost of housing, resulting in
a model that more accurately reflects past conditions.

Next EHS-C Release

The next EHS-C model will be released on October 20, 2015 with September
EHS-C data.

About Existing-Home Sales Capacity

First American’s proprietary Existing-Home
Sales Capacity (EHS-C) model provides a gauge on whether
existing-home sales are under capacity or over capacity based on current
market circumstances. The EHS-C rate provides a measure on whether
existing-home sales, which include single-family homes, townhomes,
condominiums and coops, are outperforming or underperforming based on
current market fundamentals. The seasonally adjusted annualized EHS-C
estimates the historical relationship between existing-home sales and
the U.S. population demographic data, income and labor market conditions
in the U.S. economy, price trends in the U.S. housing market, and
conditions in the financial market. For example, seasonally adjusted,
annualized rates of existing-home sales above the level of the EHS-C
indicate market turnover is outperforming the rate fundamentally
supported by the current conditions. Conversely, seasonally adjusted,
annualized rates of existing-home sales below the level of the EHS-C
indicate market turnover is underperforming the rate fundamentally
supported by the current conditions. Actual seasonally adjusted,
annualized existing-home sales may exceed or fall short of the capacity
rate of sales for a variety of reasons, including non-traditional market
conditions, policy constraints and market participant behavior. Recent
EHS-C estimates are subject to revision in order to reflect the most
up-to-date information available on the economy, housing market and
financial conditions. The EHS-C will be published prior to National
Association of Realtors Existing-Home Sales report each month.

First American Financial Corporation (NYSE: FAF) is a leading
provider of title insurance, settlement services and risk solutions for
real estate transactions that traces its heritage back to 1889. First
American also provides title plant management services; title and other
real property records and images; valuation products and services; home
warranty products; property and casualty insurance; and banking, trust
and investment advisory services. With revenues of $4.7 billion in 2014,
the company offers its products and services directly and through its
agents throughout the United States and abroad. More information about
the company can be found at www.firstam.com.